Proposed labour reforms: when a labour lawyer speaks like a labour economist

Labour lawyer Shimali Ranaraja (left) in conversation with AdvocataChief Executive Dhananath Fernando

Ranaraja’s position is that the current labour laws in Sri Lanka are defective since they cover only the formal organised labour market. Apart from this group, she says, there is a vast informal sector which employs a large portion of the workforce in the country. This is a valid argument. However, in economics, labour as a resource, does not consist only those manual and professional workers in the formal or informal labour markets. It is the quantity as well as the quality of the labour that contributes to economic growth: quantity in terms of numbers and quality in terms of the knowledge base. The latter depends on the age profile of the workers as well as the talents and skills acquired by them on a continuous basis

Labour is as important as capital

Growth theories tell us that to produce goods and services, a must for sustained economic growth, several factors should get together. One is the physical capital in the form of machinery, buildings, roads, infrastructure facilities, and so on. Another is human capital which takes several forms: manual labour, intellectual workers, technical knowhow, and managerial skills. A third is the level of technological advancements. An economy desirous of producing goods and services for use by its members or by those outside the economic borders should see to three requirements. They should be combined aptly to facilitate production. They should be available for production in time, in sufficient quantities, and in the required quality.

Further, the economy should ensure that they grow both in quality and volume continuously to give that economy a competitive edge over others. With respect to physical capital, what this means is that there should be a set process for replacing the worn-out capital on one side, and equipping the economy with new modern capital if the prevailing capital becomes obsolete due to new technological inventions. With respect to labour, it means that the labour force should grow at a safe pace, workers should be trained continuously to upgrade their productivity and production capacity, and there should be flexibility for workers to move from one location to another, from one firm to another, from one industry to another, and from one country to another. This process in economics is known as labour development. 

With respect to technology, the economy should be resilient to accept and adapt new technologies which should be produced within the country or acquired from those who have already invented them. It is the job of the Government, as the growth promoter, to adopt a set of suitable policies to help these three factors to do their job in the economy. 

Governments have been proactive and promotional with respect to physical capital and technology. But with respect to labour, their approach has been substantially regulatory guided by a controlling mind set. This should not be the case since all the factors have an equally important role in taking a country forward. The Governments have formed labour laws to control and regulate the association of labour as unions, their bargaining power has been stumped by using all the types of repressive laws, the human rights in the Constitution are often violated when applying to labour, and no proactive or promotional role is played by the Governments for the labour already employed

Labour laws should be proactive and promotional

The requirement here is that the Government should set itself into a proactive and promotional policy framework. A proactive Government will always be on the lookout for changes that are taking place in these three factors and adopt appropriate policies in advance to mitigate risks, on one side, and get the best for the country, on the other. For instance, if the onset of artificial intelligence displaces most of the routine and intellectual jobs, the Government should start a rapid training program to equip the workers with talents and capacity to face the new work environment. If the old capital is becoming obsolete due to new inventions, the Government should have a program to replace it with modern capital without interrupting the ongoing production processes. The technological base is changing every day replacing old technologies with new ones. 

The proactive job of the government is to help the economy go through this transformation seamlessly without interrupting the ongoing production processes. However, if the Government is reactive, counteractive, inactive, or non-active, it is the production capacity and consequentially, the sustained economic growth that will suffer. The promotional role of the government is to help both the private sector and the state sector entities develop all the three factors in such a way that the country is ahead of the rest of the countries and possesses a growing and modern physical, human, and technological base. 

Proposed labour law

However, the Governments have been proactive and promotional with respect to physical capital and technology. But with respect to labour, their approach has been substantially regulatory guided by a controlling mind set. This should not be the case since all the factors have an equally important role in taking a country forward. The Governments have formed labour laws to control and regulate the association of labour as unions, their bargaining power has been stumped by using all the types of repressive laws, the human rights in the Constitution are often violated when applying to labour, and no proactive or promotional role is played by the Governments for the labour already employed. This is the case with the new labour law that has been proposed by the Government as revealed by labour lawyer Shimali Ranaraja in conversation with Advocata’s CE, Dhananath Fernando (available at: https://www.youtube.com/live/Fkw8oq7oz3U?si=VZza8dKupPCmULDJ). 

Consulting stakeholders 

Ranaraja has been objective and analytical in her views on the labour law. She does not take side, the Government, employers, or the workers. The prevailing labour laws in Sri Lanka dates to the colonial times based on the necessities of the colonial master and the labour conditions in the centre of the colony, the Great Britain. There had been about 44 such laws and Sri Lanka is presently using daily about 15 of them. Since they were enacted in a different environment, says Ranaraja, they do not sit coherently with the emerging economic conditions, especially the digital economy. Hence, there is no question about the need for amending them. But since labour laws apply practically to everybody in the country – whether as a worker, employer, relative, or a friend of those parties – it is necessary that all are fully aware of what is being contemplated in the proposed law. That is because if any change that is needed, that should be done before it is approved by Parliament. Once it is approved, nobody can make objections to them. 

Hence, it would have been essential for the Ministry of Labour to consult the three main stakeholders, namely, employers, workers, and trade unions, widely before coming up with the draft law. To their credit, they had a series of public consultations to find the view of the public about the amendment of the laws. That is useful but not sufficient. The sufficient condition would have been the consultation of the three main stakeholders widely and critically. This essential requirement has not been met in the process of drafting the proposed law. Hence, it lacks the inputs and views of the three main parties to whom these laws directly apply.

This draft law, after being drafted by the Ministry of Labour, was presented to the National Labour Advisory Council in July 2023.That Council is an informal body that could be summoned by the Minister of Labour from time to time as the need arises. It seems that it has been drafted in the centre and nobody knows how far the wide consultations made have been used for making it, opines Ranaraja. 

It would have been essential for the Ministry of Labour to consult the three main stakeholders, namely, employers, workers, and trade unions, widely before coming up with the draft law. To their credit, they had a series of public consultations to find the view of the public about the amendment of the laws. That is useful but not sufficient. The sufficient condition would have been the consultation of the three main stakeholders widely and critically. This essential requirement has not been met in the process of drafting the proposed law. Hence, it lacks the inputs and views of the three main parties to whom these laws directly apply

Democratic economic policy governance

What Ranaraja has referred to as incomplete public consultation is a doctrine that is accommodated in the democratic economic policy governance, an essential feature in the social market economy ideology being followed by both the President Ranil Wickremesinghe and the opposition Samagi Jana Balavegaya. But as I have observed in a previous article in this series (available at: https://www.ft.lk/columns/Target-2048-Part-VI-Economic-democracy-principles-should-be-followed-to-the-letter/4-752049), the process should be complete with consultations being made with all the important stakeholders and by accommodating the requirements which these groups have presented to the authorities. If there is a wide-spread objection to the policy, it should be abandoned. 

To make the consultation more effective and convenient to stakeholders, it is important that e-consultation mechanisms are established as recommended by a recent OECD report on Germany, the country of birth of the Social Market Economy Ideology. It also has recommended that policymakers should maintain ‘a continuous dialogue with stakeholders throughout the preparatory stage’. It seems that the Ministry of Labour has conducted the public consultation as an act of fashion to impress others and not passionately to meet its objective of ensuring democratic economic policy governance. 

Defective labour laws

Ranaraja’s position is that the current labour laws in Sri Lanka are defective since they cover only the formal organised labour market. Apart from this group, she says, there is a vast informal sector which employs a large portion of the workforce in the country. This is a valid argument. However, in economics, labour as a resource, does not consist only those manual and professional workers in the formal or informal labour markets. It is the quantity as well as the quality of the labour that contributes to economic growth: quantity in terms of numbers and quality in terms of the knowledge base. The latter depends on the age profile of the workers as well as the talents and skills acquired by them on a continuous basis.

It is accepted that a young workforce is better than an old workforce since the young is resilient, trainable, willing to take risks, and able to adapt to new technologies and techniques easily. Sri Lanka’s workforce is fast aging since the rate of growth in population has fallen from around 1% a year a decade ago to half a percent today. The median age of a Sri Lankan today is 34, compared to 27 in India. With the declining growth rate, the population is to peak by 2035 and by 2050, the median age will increase to about 45. The learning point here is that an old broom cannot sweep so effectively and efficiently as a new broom. Hence, Sri Lanka is losing the benefit of the young population bonus which should be reckoned by any reform of the labour laws. If the new laws are to regulate the aging work force more stringently, Sri Lanka stands to lose from the point of labour’s contribution to economic growth. 

To make the consultation more effective and convenient to stakeholders, it is important that e-consultation mechanisms are established as recommended by a recent OECD report on Germany, the country of birth of the Social Market Economy Ideology. It also has recommended that policymakers should maintain ‘a continuous dialogue with stakeholders throughout the preparatory stage’. It seems that the Ministry of Labour has conducted the public consultation as an act of fashion to impress others and not passionately to meet its objective of ensuring democratic economic policy governance

Consolidating existing labour laws

Ranaraja says that the proposed labour law has simply consolidated 13 odd existing labour laws without looking at the role of the labour in contributing to economic growth. Though the authorities maintain that the archaic labour laws are the major obstacle to rapid economic growth, that was not the position taken by the employers. According to Ranaraja, in terms of the importance of labour laws as an obstacle, the urban employers have ranked it below the 5th position. For them, the more pressing obstacles are the inconsistency in policy, high cost of living for workers, frequent policy reversals, and the non-existence of the macroeconomic stability in the country. The rural based employers have not even listed it within the topmost 10 obstacles they are facing. Authorities claim that the foreign investors shun Sri Lanka because of its archaic labour laws. Ranaraja says that this is a misreading of the reasons for Sri Lanka’s poor performance in attracting foreign direct investments. Without addressing the more compelling reasons like the policy inconsistency, frequent policy reversals and macroeconomic factors, trying the attract investments via a set of consolidated labour laws will not help Sri Lanka. 

A labour law in a modern competitive digital economy is a misconception. As Ranaraja has argued, the laws should not be used for suppressing and regulating the organised workforce of the country. Instead, they should be used to develop the quality of the human capital to be on par with that in other competitive countries. In that sense, what should be done is to enact a human resource development law in which the Government, private sector employers, and human resource owners should invest in improving the quality of the workers on a continuing basis

Need for human resource development laws

A labour law in a modern competitive digital economy is a misconception. As Ranaraja has argued, the laws should not be used for suppressing and regulating the organised workforce of the country. Instead, they should be used to develop the quality of the human capital to be on par with that in other competitive countries. In that sense, what should be done is to enact a human resource development law in which the Government, private sector employers, and human resource owners should invest in improving the quality of the workers on a continuing basis. Like any other resource unit, human resources are also subject to depreciation over time due to aging, introduction of new technology, or non-equipment with new talents and skills. Therefore, they bring in yields that are rising to a level but at a falling rate. Economists call this phenomenon the law of diminishing marginal returns. 

When a physical asset suffers from this deficiency, the solution is to remove it from the production process by replacing it with a modern asset. This cannot be done in the case of human capital since it will lead to social tensions and chaos. What should be done in these circumstances is to permit the human capital to make a quantum leap by retraining and reacquiring talents and skills. This quantum leap should be repeated to facilitate human resource units to have a high level of adaptability, flexibility, and resilience. However, with an aging workforce, there is a limit to doing so. That is because, the old people cannot acquire new talents and skills efficiently like young persons. Hence, it is necessary to ensure that once an old batch leaves the work force, a new batch will take their place. This is the job of a human resource development law. 

Ranaraja is a labour lawyer. But her presentation was like that of a labour economist. In my view, those in the Labour Ministry should listen carefully to her views on reforming the country’s labour laws. But as I have pointed out above, they should be properly designated as human resource development laws.

(The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)